Shouldn’t total cash flow be higher when an asset is expensed versus capitalized because expensed will have lower net income and therefore pay less in taxes? It says total cash flow is the same on my cheat sheet.
Total cash flow remains the same and the movement of cash will be the same. Investment cash flow however, becomes higher when asset is expensed, and operational cash flow lower and vice versa.
When an asset is expensed – the cost spent to acquire the asset become current period expenses. So NI goes down, when compared to the case when the asset is capitalized. This is as you are aware, an item on the Income statement. CFO therefore goes down because of the NI becoming lower. When an asset is capitalized - it becomes a part of the Balance sheet, so the change in Long Term assets goes up. This would be a Purchase of an asset – therefore this would be a CFI outflow. In the totality of things, CFO + CFI + CFF = Total Cash Flow. In either case - Total Cash flow is the same. Asset Expensed So CFO Lower, CFI Higher, CFF same Asset Capitalized CFO Higher, CFI Lower, CFF Same Hope this helps
Yes thanks, this makes sense now.
Asset Expensed So CFO Lower, CFI Higher, CFF same Asset Capitalized CFO Higher, CFI Lower, CFF Same In case of asset expensed ---- CFI should be the same right? how does it goes higher? same question with capitalising…
The higher and lower are comparisons between the alternatives — capitalizing the asset vs. expensing the asset. in that context alone… in most of fsa it is a comparison amongst the two alternatives.
I could imagine that in case there is also possibility to “manipulate” depreciation for tax puposes there could be a change in a cash flow - one time the whole value of the asset would be tax deductible and diminish cash outflow in terms of tax and once you could depreciate only a part of the asset and therefore pay more tax. I understand we assume all companies are optimizing their tax deductible expenses and therefore there is no possibility to reduce tax expense. Am I correct?